Earnings Call: Q1 2017

Dec 21, 2016

Welcome to Accenture's First Quarter Fiscal 2017 Earnings Conference Call. As a reminder, this conference is being recorded. Would now like to turn the conference over to your host, Managing Director, Head of Investor Relations, Katie McClure. Please go ahead. Thank you, Greg, and thanks, everyone, for joining us today on our Q1 fiscal 2017 earnings announcement. As Greg just mentioned, I'm Casey McClure, Managing Director, Head of Investor Relations. With me today are Pierre Nasserm, our Chairman and Chief Executive Officer and David Rowland, our Chief Financial Officer. We hope you've had an opportunity to review the news release we issued a short time ago. Let me quickly outline the agenda for today's call. Pierre will begin with an overview of our results. David will take you through the financial details, including the income statement and balance sheet for the Q1. Pierre will then provide a brief on our market positioning before David provides our business outlook for the Q2 and full fiscal year 2017. We will then take your questions before Pierre provides a wrap up at the end of the call. As a reminder, when we discuss revenues during today's call, we're talking about revenues before reimbursements or net revenues. Some of the matters we'll discuss on this call, including our business outlook, are forward looking and, as such, are subject to known and unknown risks and uncertainties, including, but not limited to, those factors set forth in today's news release and discussed in our annual report on Form 10 ks and quarterly reports on Form 10 Q and other SEC filings. These risks and uncertainties could cause actual results to differ materially from those expressed in this call. During our call today, we will reference certain non GAAP financial measures, which we believe provide useful information for investors. We include reconciliations of non GAAP financial measures, where appropriate, to GAAP in our news release or in the Investor Relations section of our website at accenture.com. As always, Accenture assumes no obligation to update the information presented on this conference call. Now, let me turn the call over to Pierre. Thank you, Casey, and thanks, everyone, for joining us today. We are very pleased with our results for the Q1. We grew revenues ahead of the market, gaining significant market share, and I am particularly pleased that our growth continues to be broad based across the dimensions of our business, including very strong double digit growth in new high growth areas such as digital, cloud and security related services. Here are a few highlights for the quarter. We delivered strong new bookings of $8,300,000,000 We generated revenues of $8,500,000,000 with 7% growth in local currency. We delivered very strong earnings per share of $1.58 a 23% increase. We expanded operating margin 40 basis points to 15.6%. We generated strong free cash flow of $1,000,000,000 and we returned nearly $1,400,000,000 in cash to shareholders with share repurchases and dividends. So we are off to a strong start in fiscal year 2017. I feel very good about our business and the speed at which we are executing our strategy to drive differentiation for Accenture and accelerate our rotation to the new. Now let me hand over to David, who will review the numbers in greater detail. David, over to you. Thank you, Pierre. Happy holidays to all of you and thanks for taking the time to join us on today's call. As you heard in Pierre's comments, we were very pleased with our results in the Q1, which came in as expected and represent a positive first step to achieving our full year objectives. Our focused execution of our strategy continues to extend our leadership position in the marketplace and strengthen our ability to deliver significant value to our clients and our shareholders. Once again, we delivered on all three of our financial imperatives for driving shareholder value. I'm particularly pleased with the continued progress we're making in expanding our operating margin while investing significantly in our business and our people. Our ongoing focus on our fit for purpose agenda is serving us well as we seek to optimize the economics across each of our 5 businesses. So before I get into the details, let's look at our results in the context of the three imperatives. Strong local currency growth of 7 percent continues to support our strategic objective to grow faster than the market and take share. We delivered positive growth in the majority of our industry groups and geographic markets with 5 industry groups growing double digits. Strong momentum in the New continued to be the driver of our growth. With respect to sustainable margin expansion, we exceeded operating margin we expanded operating margin by 40 basis points, while continuing to make significant investments to build scale and differentiation in strategic and high growth areas of our business. And finally, regarding strong cash flow and disciplined capital allocation, we generated $1,000,000,000 in free cash flow in the quarter, which supported our ongoing objective of investing in our business while returning significant cash to our shareholders. As it relates to our capital investments, we invested roughly $600,000,000 primarily attributed to 10 acquisitions and we're well positioned to invest at least $1,000,000,000 to acquire critical capabilities this year, especially in the New. With that said, let me turn to some of the details starting with new bookings. New bookings were $8,300,000,000 for the quarter. Consulting bookings were $4,900,000,000 with a book to bill of 1.1 and outsourcing bookings were $3,400,000,000 with a book to bill of 0.9. Our new bookings came in the range we expected this quarter and represented 9% growth in local currency. This level of new bookings follows our typical pattern of lower new bookings in the Q1, which then build throughout the year. We're very pleased with our estimated bookings and strategy and consulting services combined and of course digital cloud and security related services continue to be an important theme in the work we're contracting with our clients. Looking forward, we feel good about our pipeline and we expect to deliver strong bookings in quarter 2. Turning now to revenues. Net revenues for the quarter were $8,500,000,000 a 6% increase in USD and 7% local currency, reflecting a foreign exchange headwind of roughly 1% compared to the flat impact provided in our business outlook last quarter. Adjusting for the actual FX impact, we were at the upper end of our guided range for the quarter. Consulting revenues for the quarter were $4,600,000,000 up 6% in USD and 7% in local currency. Our outsourcing revenues were $3,900,000,000 up 7% in USD and 7% in local currency. Looking broadly at the trends and estimated revenue growth across our five business dimensions, growth was led operations, which posted double digit growth for the 4th consecutive quarter. Strategy and consulting services combined as well as Application Services delivered mid single digit growth. And across those four businesses, we saw strong double digit growth in the New with all 3 components, digital, cloud and security growing double digit as well. Taking a closer look at our operating groups, products, our largest operating group led with 17% growth reflecting continued double digit growth across all industries and geographies. Our significant growth in products reflects the rapid adoption of digital cloud and security based solutions across all products industries. Financial Services grew 6% in the quarter with overall positive growth in both insurance and banking banking expect to return to positive growth during this fiscal year. H and PS came in as expected at 5% growth with balanced growth across health and public services globally and strong double digit growth in the growth markets. Communications Media and Technology grew 4% and reflected strong overall growth in both North America and the growth markets. We saw strong double digit growth in media and entertainment and solid growth in electronics and high-tech. We continue to see contraction in Europe driven primarily by communications. Finally, resources revenues decreased 2% in the quarter driven by continued challenging market conditions in both energy and chemicals and natural resources, especially in North America. The bright spot continues to be utilities, which again delivered double digit growth in the quarter, but not at the level required to offset the pressure in the other two industries. We expect our resources operating group to continue to navigate a challenging environment throughout this fiscal year, but remain very focused on delivering flat to slightly positive growth for the full year. Moving down the income statement, gross margin for the quarter was 32.1% compared to 32% in the same period last year. Sales and marketing expense for the quarter was 10.4% compared with 10.9% for the Q1 last year. General and administrative expense was 6% compared to 5.8% for the same period the same quarter last year. Our operating income was $1,300,000,000 in the first quarter, reflecting a 15.6% operating margin, up 40 basis points compared with quarter 1 last year. Our effective tax rate for the quarter was 20.4% compared with an effective tax rate of 29.3 percent for the Q1 last year. The lower effective tax rate was primarily due benefits from adjustments to prior year taxes as well as our early adoption of the new accounting standard on employee share based payments. Net income was $1,100,000,000 for the Q1 compared with net income of $869,000,000 for the same quarter last year. Our diluted earnings per share were $1.58 compared with EPS of $1.28 in the Q1 last year and this reflects a 23% year over year increase. Date services outstanding were 44 days compared to 39 days last quarter and 41 days in the Q1 of last year. Free cash flow for the quarter was $1,000,000,000 resulting from cash generated by operating activities of $1,100,000,000 net of property and equipment additions of $85,000,000 dollars Our cash balance as of November 30 was $4,100,000,000 compared with $4,900,000,000 at August 31. With regards to our ongoing objective to return cash to shareholders, in the Q1, we repurchased or redeemed 5,000,000 shares for $588,000,000 at an average price of $116.44 per share. At November 30, we had approximately $4,900,000,000 of share repurchase authority remaining. Also in November, we paid a semiannual cash dividend of $1.21 per share for a total of $785,000,000 This represented an $0.11 per share or 10% increase over the dividend we paid in May. So in summary, we're very pleased with our quarter one results and we're off to a good start in fiscal 2017. Now let me turn it back to Pierre. Thank you, David. Our very strong Q1 results demonstrate that we continue to execute a strategy that is resonating very well with our clients and driving differentiation for Accenture in the marketplace. We continue to make significant investments to rotate our business to the new digital cloud and security related services, which together now account for more than 40% of our total revenues and again this quarter grew at a very strong double digit rate. The need to go digital continues to drive strong demand from our clients around the world. We are working with ENGIE, the multinational utility, to transform its retail business model by completely rethinking the customer experience. We are leveraging the service design and innovation of Fjord, part of Accenture Interactive, to help ENGIE create new services to disrupt the market. With Hess, the global energy company, we're implementing a cloud based as a service operating model. With our cloud solutions and predictive analytics, Health is able to increase efficiency and improve maintenance across its asset base while benefiting from consumption based pricing. And we're working with 1 of the Europe's largest home improvement retailers to create and implement a new multichannel strategy to accelerate digital transformation. Our retail experience at Javelin, part of Accenture's strategy, and our designers at Fjord are helping shape and deliver a more personalized customer experience. We continue to invest across the business to accelerate our rotation to the new, both organically and through acquisition. And in the Q1, we deployed $600,000,000 in strategic acquisition. In digital, we are acquiring Octo Technology, a leading digital consulting firm based in Paris. We also acquired Carma Rama, a creative agency in the UK and Allen International, a design consultancy that specializes in banking. In cloud, we are quite Day 9, a leading workday consulting and services provider and ASCO Consulting, which expands our capabilities in ServiceNow. In Security, we acquired different points securely, enhancing our cybersecurity capabilities for U. S. Federal agencies, and we completed the acquisition of Redcor in Australia. We also further strengthened the capabilities of Accenture's strategy with the acquisition of Curt Salmon, which brings deep expertise in the retail industry. At the same time, we continue to leverage our unique position in the technology ecosystem. Our clients value our independence as the leading partner of both the established providers and emerging players. With Google, we formed a new alliance to create industry specific cloud and mobile solutions to help clients advance their digital transformation agendas and improve business performance. We expanded our sales force capabilities to include new platform for financial services, consumer goods and life science companies. And we now have significantly more people skilled in sales force than any other provider. We are always looking to anticipate what's next and our unique innovation architecture enables us to take an innovation led approach to help our clients invent the future. A key element is Accenture Ventures, which includes a robust top on innovation program that works with startups, accelerators and entrepreneurs. And we recently formed a strategic relationship with Partec Ventures, a leading venture capital firm to help clients tap into the rich pool of innovation from startups in Europe and Silicon Valley. Turning to the geographic dimension of our business. We continue to grow ahead of the market in each of our geographic region. In North America, we grew revenue 6% in local currency, driven by strong double digit growth in several key industries, including consumer goods, retail and travel services, life sciences and media and entertainment. In Europe, we had another strong quarter with 7% growth in local currency, driven by double digit growth in several of our major markets, including the UK, Germany and Switzerland as well as high single digit growth And in growth markets, we were very pleased with our 10% growth in local currency, led by strong double digit growth in Japan and China. In closing, our rotation to the new is clearly at the heart of our strategy to position Accenture for future growth. The strong capabilities we are building are not only recognized by our clients, but also by many prominent industry analysts. And I'm very proud of the recognition we have received for the relevance and depth of our services ranging from the strength of our overall position in digital services to our specific expertise in analytics, cloud and digital experience to our leadership in emerging technologies like intelligent automation, Internet of Things and Blockchain. So with the Q1 behind us, I'm pleased with our result and especially with the balance we are striking between delivering results today while continuing to invest to drive future growth. With that, I will turn the call over to David to provide our updated business outlook. David, over to you again. Thank you, Pierre. Let me now turn to our business outlook. For the Q2 of fiscal 2017, we expect revenues to be in the range of 8.15 dollars to $8,400,000,000 This assumes the impact of FX will be negative 2% compared to the Q2 of fiscal 2016 and this range reflects an estimated 5% to 8% growth in local currency. For the full fiscal year 2017, based upon how the rates have been trending over the last few weeks, we now assume the impact of FX on our results in U. S. Dollars will be negative 2% compared to fiscal 2016. For the full fiscal 2017, we continue expect our net revenue to be in the range of 5% to 8% growth in local currency over fiscal 2016. For operating margin, we continue to expect fiscal 2017 to be 14.7 percent to 14.9 percent, a 10 basis point to 30 basis point expansion over fiscal 2016 results. We continue to expect our annual effective tax rate to be in the range of 22% to 24%. For earnings per share, adjusting for the updated FX assumption, we now expect full year diluted EPS for fiscal 2017 to be in the range of $5.64 to $5.87 or 6% to 10% growth over adjusted fiscal 'sixteen results. For the full fiscal 2017, we continue to expect operating cash flow to be in the range of $4,600,000,000 to $4,900,000,000 property equipment additions to be approximately $600,000,000 and free cash flow to be in the range of $4,000,000,000 to $4,300,000,000 Finally, we continue to expect to return at least $4,200,000,000 through dividends and share repurchases and also continue to expect to reduce the weighted average diluted shares outstanding by slightly more than 1% as we remain committed to returning a substantial portion of cash to our shareholders. With that, let's open it up so we can take your questions. KC? Thanks, David. I would ask that you each keep to one question and a follow-up to allow us many it's possible to ask a question. Greg, could you provide instructions for this on the call, please? Your first question comes from the line of Tien tsin Huang from JPMorgan. Please go ahead. Hey, good morning. Good talking to you all. Hey, good morning, Tien Tsin. Just the, I guess, Q2 row here not beating revenue guidance. Maybe where are you seeing change in business momentum? It looks like strategy consulting in North America slowed a little bit. Can you comment there? Any big changes thematically in terms of just business momentum? Thank you. Well, again, I'll just comment on how we feel about the revenue and then Pierre will chime in with some additional colors as well. I mean, let me start Tien Tsin with the fact that when we provide guidance, we provide it because we expect we're going to land in that range. And as pleased as we've been in the past where we've exceeded the range that hasn't been our intent. We don't set guidance with the expectation that we're going to beat it. So having said that, in that context, again, we're very pleased with 7% growth. And there's really two reasons, I would say three reasons underneath that. One is that that growth does reflect we believe significantly higher growth in the market. And when you look at what that means in dollar terms, when you look at the dollar share gains that we've taken underneath that 7% growth, it's tremendous. The second reason we're pleased with the 7% growth is because when you peel underneath the 5 operating groups and look at it across the 13 industries in the 20 some odd geographic markets that we operate around and around the world, the vast majority of those had positive growth and in many cases double digit growth. So if you look at our 13 industries, 5 of the 13 had double digit growth. And of course, the third reason we're pleased with the growth is because of the continued very strong growth in the New. And so we feel very good about the growth to be clear. We did signal previously that we had some areas in our business that were more challenged. We've talked about chemicals and natural resources and energy for some time now and I would say that quarter 1 for the most part was more of the same, maybe a little bit more pressure in North America in the Q1. We signaled last quarter that we had a period of lower growth that we were going to be going through in Communications Europe and that played out as expected. And then I did mention Banking and Capital Markets in North America, which is more attributed to a revenue pattern on a few large clients in the quarter with the expectation that we'll return to positive growth. But even in Banking and Capital Markets, if you look globally, we had very good growth. And in Europe, in Banking and Capital Markets, we had double digit growth. So our guidance assumed that growth rates in many of our areas of our business would be lower. And that's what's played out. Sorry for that long answer. But Pierre, I'll see if you want to add anything. No, I mean, not much to add on this. I guess to answer, I mean, very directly your question, do we see any change in the marketplace? My simple answer is no. I think the we do not see any new trends or new situations, as David said very well. We have some very specific situations. But otherwise, again, our growth is broad based across the different countries, different industries, so the different dimension of the business. And I mean, for us, the name of the game is to be in the guidance. So probably, we set some sort of track record of beating the guidance, but that is not the intent. The intent is to deliver in the guidance and to provide you with the right information on how we see the business. Understood. Now that's helpful. And you did signal those items. So maybe just my quick follow-up, just the updated thinking on outsourcing versus consulting growth in fiscal 2017? And thanks for the time, guys. Okay. Thank you, Tien Tsin. If you look at the full year, our view has not changed for consulting as a type of work and outsourcing as a type of work. Last quarter and this is true today, our view is high single digits for consulting and mid to high single digits for outsourcing and that is unchanged from 90 days ago. Your next question comes from the line of James Friedman from Susquehanna. Please go ahead. Hi, good morning. It's Jamie at Susquehanna. Wanted to ask a quick question about the operating margin trajectory. David, I noticed that the products OG operating margin expanded about 300 basis points to 18%. If you could share whether that's sustainable and what some of the inputs are that are pushing that margin so high? Yes. If you look at products specifically, they are doing quite well both in terms of the top line growth and the profitability. There is no doubt about it. When you look at their expansion in margin, I think at a high level, I think that's a reflection of 2 things. Number 1 is, I think it's a really good illustration of the power of executing the strategy. So what you see in products is a high level of rotation to the new. You see a strong component of consulting and strategy services combined, so very much operating kind of at the heart of the industry and the client agenda. And I think what you see in their profitability is a reflection of that. It's the power of being able to really bring to the fullest extent our business architecture around 5 businesses rotating into new with very, very deep industry expertise that's what's at play there. As part of that they also are more efficient just as a tactical point in sales and marketing costs. So overall, we were pleased with our profitability. We were pleased with our contract profitability. We were pleased with our payroll cost structure overall. And as I've said before, when our payroll is efficient and our contract profitability is good, then good things happen. And of course, in the mix, we continue to invest significantly in the business at the same time. Yes. And just as my follow-up more generally, how should we contemplate the margin characteristics of the New versus the rest? We would think that the new would have higher bill rates, but would also have higher pay rates. So any inputs that you might have there would be helpful. Yes. I would say that on its our intent is that so let me talk about intent as opposed to be clear, I'm not commenting on specifically the quarter, but our intent is that our profitability profile in the New would be accretive to Accenture. And there's obvious reasons for that. Number 1 is you're talking about a new and emerging high impact, high value marketplace where there is a scarcity of skilled partners who can do what we do at scale. And so those market conditions typically lend themselves to the opportunity for good economics. And so that's how we look at the new and that's our focus. Thank you. Thank you. Your next question comes from the line of Lisa Ellis from Bernstein. Please go ahead. Hi, good morning guys. Hi, Lisa. Good morning. Hi. Can you talk a little bit about the maturity of the service lines in digital and because you guys probably have the best broad based visibility into the evolution of that market. So specifically, how is the mix evolving from the earlier stage shorter duration kind of concept and design work into full scaling and rollout? And how do you see that changing in your pipeline as you look forward? Yes, sure. Thanks a lot, Lisa, for your question. What we believe is, on one hand, it's still certainly early days of this digital transformation. Now as you're saying, we're starting to see some more maturity in the way our clients are buying our services. So we have moved from the very early days of small project or prototype, proof of concept, testing the water with digital to try to understand what are the new business models. I think this wave, at least for the B2C, for the B2C is behind us for the business to consumer, sorry, is behind us. And now the business to consumer digital related services are maturing more rapidly, driving bigger transformation projects. Now if you move to more the B2B related to Internet of Things, so industrial Internet, we're still in wave 1, where indeed, we're working more around prototyping the future, finding user cases for the smart glasses, for the analytics and for the drones and all of the alike. And so the maturity probably will come in the next 12 months. So I still see a bit of a difference between the B2C and the B2B. And accordingly, if you look at Accenture, we have been scaling to leadership our services from a B2C standpoint. I'm thinking, of course, about the great success of Accenture Interactive. We are now we are in a leading position. I'm thinking as well of all what we are developing in e commerce kind of services or analytics supporting as well the business to consumer. And at the same time, we are investing and scaling our services more on the B2B, especially around the Internet of Things, the industrial Internet and other type of services such as artificial intelligence as well. Terrific. And then as my follow-up, can you comment on Accenture's perspective on the policy debate around H-1B visas? Clearly, you're not in the crosshairs of that, but you are in the top 5, I think, H1B visa users. So curious for your perspective on that. I don't think that this is really the forum for us to elaborate on our view on that. Typically, we wouldn't comment on policy matters like that. What I would say is that from our perspective, we have a very strong robust workforce in the United States. We have, I think I'm correct, 50,000 employees, 50,000 employees in the United States. And the vast majority of those or permanent residents. And so our model so I can speak for Accenture. Our model is to build resonant skills, if you will, in all of the major markets where we operate. And again the U. S. Is a reflection of that. So speculating I don't think serves really, really would make sense at this point in terms of where it might go and it would be tough to predict. Thank you. Happy holidays, guys. Thank you. Same to you. Your next question comes from the line of Bryan Bergin, Cowen. Please go ahead. Hi, thank you. Can you make some comments around the outlook for clients' 2017 budgets and then how do you characterize that now versus this time last year? Clients' 2017 budgets versus last year? Yes. So their outlook and what you're seeing in their behavior to start? Yes. We're watching carefully, especially as we're getting at the back end of calendar 'sixteen, what's happening in 'seventeen. I mean, first, we look at it from different angle, of course, our experience with clients, what we see from the industry analyst and then making our judgment. First, we could confirm that indeed, we see the rotation of the budget from legacy technology services to digital related services. And frankly, it's playing in our favor. No doubt that we continue to see that shift in the budget of our clients. Interestingly, the overall budget, including digital, is probably increasing more than decreasing because you have the budget coming from, for instance, digital advertising and digital marketing now are becoming part of the addressable market for a company like us. So our rotation to digital, cloud and security has opened new opportunities for us, And it's confirmed by the industry analysts who are all mentioning the shift from legacy technology to digital related services. For the rest, I guess, as mentioned by David, we're pleased with our pipeline. We have good prospect for the Q2 bookings. So all of this is confirming to me that the demand is still there, but again, more and more driven by what we're calling the new and new services around digital in contrast to the legacy services. Okay. And then just my follow-up. The operations group business performance has obviously been solid. Can you talk about, I guess, the split particularly how the BPO business is doing across verticals? Thanks. Yes. The anchor of our operations business and therefore the strength is really our BPO business, which is world class industry leading. And the drivers of growth have been are remain pretty consistent. When you look at F and A, when you look at procurement, those are 2 of the primary anchors and always behind the results and operations in BPO in any given quarter. So, yes, it's BPO centric and we're very pleased with our results in the Q1. And I would say it's more it's really more of the same of the story we've been telling now for many quarters. Thanks guys. And as you're calling BPO, and I would like to take the opportunity to congratulate Debbie Polishuk and all the team and Manish and all the like who have been doing an extraordinary job for Accenture. And to some extent, if you have ideas, I would like to rename and to rebrand BPO because I think it's more the terminology of the past. And what we are doing is moving beyond what we used to call business process outsourcing because what's done by Debbie and the team is a profound reinvention of the way you're operating that business by bringing now platform based services at scale, highly efficient and highly intelligent. 2nd, more and more providing that business as a service, which is, of course, contributing to support the agenda of our clients where they move they want to move from fixed to variable and CapEx to OpEx. 3, it's going beyond managing operations that is bringing analytics, cloud services, amazing richness in what they do. And I truly believe, a tribute to the team, that they have been reinventing the kind of services And that is why we're growing 10%, which is much more than the BPO business and gaining significant market share. I mean, the line is always the same. The appetite from clients is for new technologies, new services, new ways of operating the business. And this is all the rotation we have engaged in Accenture these last 3 years. We are benefiting now and hopefully in the coming years to move us away from the legacy commoditizing services. Your next call comes from or question comes from the line of Ashwin Shirvaikar from Citi. Please go ahead. Good morning, Ashwin. Morning, guys. Thank you for doing the call. I guess, it's a day early. So, and that's great. Happy holidays. Same to year. I wanted to I know, David, you mentioned this is perhaps not the right forum for policy views. But with regards to a lot of the political changes that we are seeing, could you potentially go into sort of the demand implications of a Trump presidency, especially as it relates to changes in regulation in healthcare and banking? Yes. I just Ashwin, I know that that is the topic of the day and everyone is interested in trying to speculate and anticipate what a Trump presidency may bring. But again, I just don't we're just not going to speculate on that. I mean, time will tell. It's frankly it's impossible to tell right now and anybody who tells you that they have an informed view of it is probably misleading you. So we'll see. I think if you put Trump aside, there's a lot of good things that are underpinning the U. S. Economy right now, certainly some challenges as well. But when we look at it through our lens of our business, we feel good about our market in the United States and our growth prospects in the United States and we have not identified anything that we believe is going to materially change that for the fiscal year that we're in. Understood. Yes. Adding on this and not commenting, of course, on the new or the coming presidency, but talking about Accenture and what it is we were achieving. First, we know we are in a world which is highly volatile, uncertain. Almost every day, something might happen around the world. There are going to be many elections every year. In 2017, we will have elections in France, my country. There are going to be election in Germany and so on and so on. So what it is we want to achieve is to build a durable business model with at scale and relevant services, which at the end of the day should be as much as we could independent of any form of short term political effect or other effect. And I think this is what we demonstrated this last if you look 2015, fiscal year 2015, fiscal year 2016, we've been able to grow double digits. Here, we have a very strong 7% in Q1 despite the environment. So the environment is the environment. There is not much we could do. And so for us, our strategy is to take our future in our hands and drive a strategy which is going to be sustainable and durable. And I believe that nothing is going to stop us from executing our strategy and make Accenture successful. Got it. And for the follow-up question, I know you mentioned, obviously, the tax rate impact in the quarter, a part of the benefit you said was the accounting standards. So just want to check, is that a one time true up? Or should we expect, from a modeling perspective a lower level? Yes. If you remember last quarter when I signaled that we were going to adopt the new accounting standard, I signaled that it had about a 2 point impact on our tax rate. And so it was in the mix. We're not quantifying the impact in quarter 1, but it was in the mix this quarter. We don't have a materially we don't have a different view from what I commented on 90 days ago. I will say that as I said last quarter, I believe is that the ultimate impact depends on what happens to the stock price is the way the accounting works. And so if the stock price appreciates between when a grant is issued and versus when it's awarded then that creates a tax benefit. If the stock price goes down between the issuance and the date that it's awarded well, the award date and the date that you get the share, then it would create a tax headwind or would have a negatively impact tax rate. And so to be clear, it will depend in the future on what happens to the stock price and you're looking at the difference between when it was granted and when they actually get the it's vested and they get the award. Got it. Understood. Thank you, guys. Thank you. Your next question comes from the line of Frank Atkins from SunTrust. Please go ahead. Thanks Can you ask a little bit about sales and marketing expense, a significant driver of margin in the quarter? Where could we see that going looking forward? Yes. I mean I would say sales and marketing spend. First of all, it does ebb and flow by quarter. It's driven by obviously, it's an activity driven cost depending on opportunity pursuits, closing deals, etcetera. So it does vary by quarter. Having said that, in our fit for purpose agenda that we're driving as a multiyear effort to optimize our economics to create capacity in our P and L both to meet our margin expansion goals to drive our share price, but to also importantly create significant headroom in our P and L to invest in our business. That is all in the mix of our fit for purpose agenda. And this is one example of the power of the focus that we have on increasingly managing each of these businesses and optimizing the economics for each business individually. And that includes optimizing sales and marketing costs for each of the businesses individually recognizing that the way you approach sales and marketing in a strategy practice is fundamentally different than the way you do it in an operations practice. And so we continue to focus on optimization across all of our business activities and our entire cost structure of which sales and marketing is a key component of that. So we'll see how it goes. It does vary by quarter, but we were pleased with the efficiency of our cost overall in the Q1 certainly with the 40 basis points of expansion. And then for my follow-up, as we kind of step back and look at the 10 to 30 bps and target expansion over time, if we were just to take the midpoint to 20 bps of margin improvement, how do you see that breaking down in terms of either gross margin or efficiency gains or changes in G and A or sales and marketing? What are the kind of buckets driving that? I'm not going to break it down that way because that's really not the way we manage our business as we've said. What I would say is, is that the 2 biggest influencing factors to margin expansion are 1, payroll efficiency. So if we expand margins over time that almost certainly means that we are increasingly driving a better relationship between payroll costs and revenue. And the second big contributing factor is our client or contract profitability. And those are the 2 extent we have an expectation or ambition to expand operating margin over time, both of those things are contributors. Thank you very much. Thank you. Your next question comes from the line of Brian Essex from Morgan Stanley. Please go ahead. Good morning, Brian. Hi, good morning. Thanks for taking the question and happy holidays. I wanted to ask a little bit about M and A. Unfortunately, you guys are buying all of our best software channel checks. As you build that business, and maybe you're more integrated with Agile processes and integrators in certain cloud segments, whether it's specific to Now, Workday or Salesforce.com or regionally. Along with Pierre's comments of building a more durable business, I mean, how much more visibility are you gaining in the new relative to your historical model? How much visibility do you have in whether it's consulting or ongoing application development maintenance business because of that shift in your business? Yes. I mean, there is a shift in the nature of the services we are doing. Now these services would apply in consulting, in strategy consulting, system integration and solution implementation, outsourcing and alike. So they're all very similar in the nature of the business of what we've been doing for many years now. It's the nature of the services, which are, of course, different because they are in digital or software in the cloud. But the software in the cloud, at the end of the day, is an application package you have to implement and we know how to do that. So I don't believe that the shift and our rotation to the new is changing the visibility on the business or is changing the fundamentals of our business. Fundamentally changing the nature of the services we are providing in digital marketing, in cloud, in security services and so forth. But I don't think it is changing the visibility or it has a profound impact on the business model. And is that the case if as you shift I mean, the model has shifted more towards, I guess, consulting than outsourcing. Is that the case from an overall mix perspective in terms of as you partner with your clients for agile development and you have centers of excellence to work alongside them, does that give you more visibility on the consulting side? Yes. I mean, certainly. I mean, what I mean, you've seen the results in just a few quarters around our consulting business, which has been significantly moving up. And of course, the digital has been a driving force on this consulting growth. But when you look at it, you still have the same continuum with clients. It's starting with strategy and here more digital strategies and corporate strategies from the past. Then you need to create operating models, digital operating model for clients. And you need to understand very well the industry drivers and disruptions, see the role of what we're calling Accenture Consulting. Then you build solution, and this is the job of Accenture Digital and Accenture Technology. And then you operate on behalf of the business if clients want to do that. And at the end of the day, that's why we build this business architecture from strategy to building solution to operate on behalf clients. And we are the only one in the marketplace to have this continuum of services because this is what we believe the client is going to buy moving forward. And there's always going to be a role for the outsourcing because again, you envision the business, you build solutions and you operate solutions. And we want to be a leading company in these three activities, if you will. And if you look at digital, indeed, it's starting more with the strategy and the consulting piece of the business. But there are already many activities we have from an outsourcing standpoint coming in my mind would be cloud, where we're managing cloud services on behalf of clients would be cybersecurity, where a significant part of our cybersecurity services are managed services. And 3, I'm thinking about analytics. We are more and more as well driving on behalf of the clients, including some marketing campaign. So again, you need to look at it as a continuum of services we're providing the clients. So we're there for whatever they want to execute. Very helpful. Thank you very much. Thank you, Brian. Your next question comes from the line of Jason Kupferberg from Jefferies. Please go ahead. Good morning, Jason. Hey, good morning, David. I just wanted to start with a question on, I guess, you get the 3 pressure points in the business right now, the North America Banking and Capital Markets, the North America Resources or at least parts resources in North America and then European comp. So I was just hoping you could maybe give us a sense of in aggregate how big are those 3 in terms of percentage of your revenue? And do you feel like individually that they've kind of troughed here in Q1? Yes. So it's interesting you asked that question Pierre and I were talking about this just recently just as we analyze our business. If you look at the few areas where there are some market dynamics that are creating pressure on our business, the areas you called out that represents less than 15% of our revenue. 85% of our business and I don't mind putting this out in traffic so to speak, the remaining 85% of our business is growing double digit, is growing double digit. So when you look at 85% of our business, it's really a very consistent pattern with what we've seen now for many quarters. We have these few concentrated areas where the market dynamics are such that it has created some challenges in the quarter that we just closed. And in some cases to be fair and we called it out and pointed to some of those challenges will extend into future quarters this fiscal year. But I think the point of that and it gets back to the statement that is to why we're so pleased with our business is that the vast majority of our business is really doing quite well and continuing to grow and expand consistent with what we've seen for many quarters. Yes. It does speak to the benefits of the diversification you obviously have. Just as a follow-up, I mean, obviously, the equity markets have been pretty excited about the U. S. Election. But now as we head into January, is there a thought process that some enterprises may hesitate on new project starts and ramp ups just at the outset of the calendar year until there is greater clarity on the initial priorities of the new administration? And have you built anything into your guidance to sort of risk adjust for that? We are Go ahead, David. David, you might comment on your risk adjustment or things like this. But no, I think we've not seen a change in the U. S. In projects. And for me, maybe let me let me share with you what I see. What I think is different with the digital transformation of the industries, the way we look at it, is and I don't want to be too emphatic, but this being disrupted and being put out of the business is clearly in the mind of all CEOs on the planet, including the U. S. There is a very strong feeling and understanding that if you're not changing your business models, if you're not surfing this revolution of the new, if you're not adopting fundamentally new way of operating digitally enabled, you can be put out of the business. And I think this force of I could disappear if I'm not really changing now, and you have all the facts behind this, this driving force for me is or the driving forces are more significant than any presidential election. When you fear about your future as a company, when you fear you can be put out of the business, I don't think you're going to stop your transformation because there is an election. And at least, if myself leading a company as a CEO, believe me, I would not change my transformation agenda because there's going to be a French election. Thanks. Very helpful. Thank you, Jason. Greg, we have time for one more question and then Pierre will wrap up the call. Okay. That question comes from the line of Bryan Keane from Deutsche Bank. Please go ahead. Good morning, Bryan. Good morning, guys. Thanks for fitting me in. Just want to ask about consulting. Consulting had been healthy double digit growth last fiscal year. I think it was 14% constant currency in 3Q and then 13% in 4Q. It dropped a little bit down to 7%. So just in particular, curious to see what's happening in consulting. And then you also said David that you expect it to be high single digits for the year. So that would suggest a little bit of a rebound going forward in consulting. So be interested in your thoughts there. Yes. So let me just kind of do a little fact connecting just for a second. So Brian, when the comment earlier when I answered it that was for consulting type of work where I said high single. And so when we talk about consulting type of work and relate that to our 5 businesses that includes Accenture Strategy, Accenture Consulting and the application development part of application services. So when you look at those three areas which roll into consulting type of work, the high single digit is our view. When you look at strategy and consulting combined and now I'm talking about the businesses, 2 of the 5 businesses, that grew mid single digits in the first quarter, which was right in the range we had expected. On the last quarter's call, I believe I stated that the growth for consulting and strategy and consulting and bond for the year would be mid to high single digits. And so we're pretty much in that range. We again, we're very pleased with our consulting bookings in the quarter and that goes across strategy and consulting combined and the app development part of app services and typically bookings lead to revenue growth. So hopefully that clarified. But the bottom line is from a business standpoint, we see a lot of demand drivers including back to digital and the new as Pierre has alluded to a couple of times that really serve us well in our strategy and consulting business. And so it's a very active marketplace at this point in time. Okay, helpful. And then a lot of questions in the industry around pricing, both in consulting and outsourcing. So we'd love to get your thoughts on are you seeing pockets of pricing pressure versus pricing power throughout the business? Thanks so much and happy holidays. Thank you. Same to you. We've been very pleased with our pricing. I would say for the most part, we again are very pleased with our pricing results. The one area where there's pricing pressure and we've talked about this is that where you have areas that are highly or rapidly commoditizing and you look at application maintenance type services as the primary example, that's where pricing is most intense and most competitive. But in that area, we're holding our own in the context of that market. Otherwise, we've been very pleased with our pricing. Okay. It's time to wrap up. And thanks again to all of you for joining us on today's call. Before we wrap up, I want to mention that Casey McClure, who has been our excellent Head of Investor Relations for the past 6 years, is moving to another role at Accenture as the Finance Director for our Communication, Media and Technology Operating Group. Accordingly, Angie Park will become our new excellent Head of Investor Relations. And Angie has tremendous experience, held many finance roles during more than 20 years at Accenture. So compared to me, Angie, you're just a kid with my 30 7 years. I want, of course, to take this opportunity to really thank Casey for dedication to deliver value to our shareholders and to our business and to have supported so well David and I as investor relationships. Thanks a lot, Katie. And I look forward to working now with Angie, and I know she will be reaching out to many of you very soon, so we could continue being extremely close and friendly investor relations organization for all of you. With that, let me wish all of you investors, analysts and our Accenture people who are listening to the call a very happy holiday season. All the best for the New Year. We look forward to talking with you again next quarter.